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Why Samsung's stock could see double-digit gains

Samsung Electronics' second consecutive quarterly profit decline has failed to dent investor optimism over the company's outlook, with one analyst forecasting a 40-plus percent rise in its stock over the next 12 months.

"The earnings were higher than what they guided - that's good. Mobile and semiconductor both outperformed expectations. I'm happy about that because they are the big two divisions," Mark Newman, senior research analyst at Sanford C. Bernstein told CNBC on Tuesday.

For the first quarter, the world's biggest smartphone manufacturer reported a 3.3 percent fall in operating profit from a year earlier to 8.5 trillion won ($8.2 billion), versus guidance of 8.4 trillion won.

Newman, who has a 12-month price target of 2 million won for the stock – 45 percent above current levels – expects the handset division and semiconductor business will outperform market expectations.

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"If you look at where stock is trading, it's as if handsets are destroying value but they are extremely profitably and will continue to be even with Apple [set to unveil] the iPhone 6," he said.

"Handset earning are projected by most people to decline dramatically, but we think they will hold up. We also see better profit growth from semiconductors than expected," he added.

Profit in the mobile division reached 6.43 trillion won, down 1.2 percent from a 6.51 trillion won profit a year earlier, but up 18 percent from 5.47 trillion won in the previous quarter.

Read MoreGalaxy S5s with broken cameras 'limited': Samsung

Samsung shipped 113 million handsets in the first quarter with the proportion of smartphones in the high 70-percent range. The company said it expects second-quarter handset shipments to be similar to the January-March period, though smartphones should make around 80 percent of handset shipments in the April-June quarter.

In the chip business, profits rose 82 percent on year to 1.95 trillion won, thanks to solid demand from PC makers and tight supply.

"Going forward, we now see the majority of earnings growth coming from semiconductors, particularly memory," Newman said.

Newman is not alone in his optimism outlook for Samsung's stock.

Daniel Kim, analyst at Macquarie Securities has a 12-month price target of 1.8 million won, representing upside of 30 percent.

Read MoreThis is how much Samsung's Galaxy S5 costs to build

He says a combination of the stock's cheap valuation, positive earnings momentum, lowered expectations around Samsung as well as the potential for shareholder return will be key drivers.

"Samsung is gathering cash at a faster-than-expected pace. This increases the likelihood that the company will return cash to shareholders in the form of dividends or stock buybacks," Kim said.

Newman agrees, noting that as Samsung's growth slows and its cash pile reaches unprecedented levels, the question of how to unlock shareholder value by returning cash is now paramount.

Read MoreCan Samsung's Galaxy S5 take on the next iPhone?

"Any clarity around this critical issue should provide a significant lift to the stock," he said.

Looking at the stock from a technical perspective, Daryl Guppy, an independent technical analyst, expects the recent uptrend in Samsung's stock to continue. Guppy has an initial target of 1.5 million won for the stock.

Samsung market share dips

Samsung's smartphone market share fell to 31.2 percent in the first quarter from 32.4 percent a year ago, its first annual market share loss in the smartphone category since 2009, according to Strategy Analytics.

"Samsung continues to face tough competition from Apple at the higher-end of the smartphone market and from Chinese brands like Huawei at the lower-end," said Neil Mawston, executive director at Strategy Analytics.

Rival Apple, however, also lost traction in the quarter, with its market share declining to 15.3 percent from 17.5 percent.

The combined global smartphone marketshare of Samsung and Apple slipped to 47 percent in the first quarter, from 50 percent in the same period a year earlier.

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